Business Craves LeadershipDecember 23, 2022
Cadiz Fund News – February 2023February 14, 2023
An article written by Ian Kilbride
Forecasting is a risky endevour. Yet, structural forces, that is, those that shape the system change less rapidly than we might expect year-on-year and provide the contours of continuity. What is difficult to foresee is the possibility of discontinuity, or so-called black swan events. The outbreak of the global Covid pandemic in 2020 and the Russian invasion of Ukraine in 2022 constitute the two most notable disjuncture’s of recent times, the impact of which continue to generate uncertainty when thinking through the global prospects for 2023. Nonetheless, a number of trends, factors and forces can reasonably be anticipated and which provide the broad parameters of the year ahead.
The most notable structural change at the global level is the disruption of the pattern of globalisation itself. With few exceptions, since the fall of the Berlin Wall in 1989, globalisation has been accepted as an immutable force that propels the rapid spread of global trade, investment and finance, but equally forcefully perforates national borders and erodes national identities. Yet, the globalists mantra that countries in the same value chain don’t go to war has now been exploded as a myth by the Russian-Ukraine conflict. Even prior to the Russian ‘special military operation’ in Ukraine, the cutting of natural gas supplies and the comprehensive sanctions imposed by the West, globalisation was already under threat from the trade tariff war being prosecuted between the Unites States and China. Indeed, rather than the spread of globalisation, 2023 is more likely to witness the formation and hardening of regional economic alliances and blocs. The exception to this pattern will be the expansion of the current BRICS into a broader formation.
The war in Ukraine will continue to place Europe under conditions of energy insecurity, which, combined with post-Covid inflationary pressures, will make 2023 a particularly testing year for the European Union and UK. After a tumultuous year of politics and recent strike action in 2022, the UK will face deep recessionary forces well into 2023. Tackling military and strategic insecurity comes at a price and NATOs commitment to boost defence spending to between 2-3% of GDP will mean budgetary sacrifices elsewhere, most notably in foreign aid and development spending. This, combined with looming food insecurity and erratic climate change patterns, bodes ill for many parts of Africa next year.
While Covid has largely been brought under control globally, persistent outbreaks in China will not only have humanitarian consequences going into 2023, but the extreme lockdown measures implemented by Beijing, will continue dampen local demand, stymie manufacturing, reduce exports and exacerbate existing supply chain backlogs. A variable that is difficult to weigh is the appetite China has for bringing Taiwan to heel, or even launching a pre-emptive strike, not least to deflect domestic attention from emergent structural economic and social challenges.
In summary, the high-inflation post-Covid global environment, the multiple consequences of the war in Ukraine and China’s economic slowdown will conspire to dampen economic grow in 2023, but the outlook is not all negative.
Global inflation is being brought under control and the pattern of progressively higher interest rates is expected to ease among G7 countries in 2023. Energy prices are softening from their 2022 highs and alternative sources to Russian gas and petroleum are already being contracted. Despite significant backlogs, grain supplies are being safely exported from Ukrainian ports. It remains moot as to whether Russia has the military and political wherewithal to achieve its objectives in Ukraine, but what is clear is that the cost to the country of its special miliary operation has been enormous and is growing daily.
Further afield the economy of the United States has held up well against the odds and if the Federal Reserve can achieve the economic miracle of bringing inflation under control, without tipping the world’s biggest economy into recession, 2023 may prove a turning point for global economic recovery.
But perhaps the greatest opportunity of 2023 is to bring the global energy and climate change debate back on track. Understandably, given the global energy crisis, the United Nations Climate Change CoP 27 held in Egypt in November of this year was a disappointing failure. The world is way off track to achieve the objective of keeping global warming to 1,5˚C above pre-industrial levels and indeed, there is growing consensus that the commitments made in Paris in 2015 are simply unachievable within the next decade, or even two. But this is no reason to abandon the pledges made for each country to meet their Nationally Determined Contributions, albeit with differentiated modalities and timeframes.
It won’t be easy, but 2023 holds significant potential to a better year than its predecessor.
CEO and Chairman